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Statement of Cash Flows

Introduction

As we know, annual financial reports are comprised of: 1. 2. 3. 4. A balance sheet An income statement A changes in owners equity report And a cash flow statement

The cash flow statement is relatively new compared to the balance sheet, income statement and changes in owners equity report. The international account standards board issued international accounting standard 7 (ISA 7), accounting which became effective from 1994, which required all reporting entities to ctive issue a cash flow statement within their general purpose financial reports. ssue within report

Objectives Understanding the purpose of a cash flow statement Being able to classify accounts into operating, investing and financing activities Prepare a statement of cash flows under the direct method Prepare a statement of cash flows under the indirect method Understanding the limitations of a cash flow statement

Statement of Cash Flows

The Purpose of Cash Flow Statements Statements

A statement of cash flow is used in conjunction with other financial, tatement reports, like the balance sheet and income statement. The statement of sheet s cash flow provides a clear insight into how a business entity utilises the their cash. It provides a summary of the cash inflows and outflows from dayto-day operations day operations. How quickly debtors pay their account, that is, how quickly accounts receivable turn into cash. The business entities ability to meet current liabilities like purchases o credit and short term loans. on The business entities ability to buy or sell non-current assets like current new equipment and new investments. How the business entity utilises their capital and debt borrowings.

Usually business entities perform transactions on credit, like the purchase and sale of stock. Accrual basis accounting states that revenue is r recorded in the period in which it is earned, not the period in which it is received. Expenses are recorded in the period in which they occur, not in the period in which they have been paid. When making a cash flow statement we are interested in the cash inflows tatement and outflows that have occurred during a particular period, so accrual basis accounting isnt much help, as cash may enter the business 3 help, months after revenue has been earned and cash may exit the business 3 months after an expense has occurred. Say that stock is sold in May on credit and so cash may not be received until June. Under accrual basis accounting, the revenue is recorded in accounting, May and this is the period in which the revenue was earned. earned Electricity and gas expense occur during the month of May. However, the electricity and gas expense account may not be payable until June. Under accrual accounting the expense is recorded in May, as this is the accounting period in which the expense occurred. Our goal when making a cash flow statement is converting these accrual tatement basis transactions into cash basis. Cash basis accounting is recording the revenue in the period in which it is received and expenses in the period in period which they have been paid. Thus if revenue is earned in May, but the cash is not received until June, then under cash basis accounting, the June, revenue would be recorded in June.

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Statement of Cash Flows

Cash and Cash Equivalents Cash and cash equivalents are simply any cash that a business can get their hands on quickly. Cash at bank, an entity can obtain quiet easily by walking to the nearest bank and withdrawing the funds. Account receivables are usually converted into cash within 90 days. Short term investments like term deposits that are readily accessible or any other type of short term investments, like commercial bills or promissory notes. More to the point, cash equivalents are anything that can be converted into cash within 30 to 90 days.

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Statement of Cash Flows

Cash Flow Statement Classifications

A cash flow statement is comprised of three main categories. 1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities Cash flows from operating activities When we say operating activities what exactly do we mean? Operating activities refer to the cash inflows and the cash outflows that occur in the day-to-day operation of a business. Most items will come directly from day the income s statement and the balance sheet so it is always important to heet have these two statements on hand. However not every item on the income statement will be required. Take depreciation expense for example. Depreciation expense does not see any movement in cash (otherwise known as a non cash transaction), so it is not found in the non-cash cash flow statement. Items that are found in operating activities will tatement. come from the change i current assets and current liabilities during in the period. This is determined by comparing the current periods balance sheet with the previous period balance sheet. h periods Cash inflows mainly consist of revenue, decreases in current assets and increases in current liabilities. When an entity sells goods or performs a service they receive cash. This is therefore reported under cash flows from operating activities activities. Cash outflows mainly consist of expenses that have incurred in order to operate the business from day-to-day, increases in current assets and , decreases in current liabilities. Cash outflows can be anything from cash paid to suppliers for the purchase of goods, salaries and wages expense, income tax, borrowing costs and interest paid to lenders When trying to determine if a transaction comes under the heading cash flows from operating activities ask, does it appear in that current assets oes or current liabilities section of the balance sheet? If yes then it comes under cash flows from operating acti activities.
Cash flows from operating activities Cash receipts from customers (inflow) Cash paid to suppliers and employees (outflow) Cash generated from operations Interest received (inflow) Interest paid (outflow) Income tax paid (outflow) Net cash from operating activities $ xxx $(xxx) $ xxx $ xxx $(xxx) $(xxx) $xxx

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Statement of Cash Flows

Cash flows from investing activities Cash flows from investing activities refer to what a business entity uses their revenue for. Changes in non-current assets during the accounting period (determined by using the balance sheet) are reported in the cash heet) flows from investing activities section of the cash flow statement. low Cash inflows consist of items like the sale of non-current assets and the current sale of share debentures and intangible assets. When an entity sells shares, non-current assets or shares they are receiving cash for items that were current once considered an investment. Cash outflows consist of the purchase of non-current assets. When an current entity purchases a non non-current asset it is considered an investment as its ent meant to provide a business entity with future economic benefits. The purchase of shares and debentures is the therefore considered an investment because when an entity loans cash to another entity they are expected to ecause exp receive the amount they loaned (the principle) plus any future interest or dividends. It should be noted that we have interest received in the operating activities section of the cash flow statement. Depending on tatement. what you prefer, it can be recorded in the investing activities section also. recorded
Cash flows from investing activities Purchase of planet, property and equipment (outflow) Purchase of investments (outflow) Cash from sale of non non-current assets (inflow) Dividends received (inflow) Net cash used in investing activities

$(xxx) $(xxx) $ xxx $ xxx $xxx

Cash flows from financing activities Financing activities refers to how a business entity finances their day day-today business operations. Changes in non-current liabilities and current owners equity during the period (determined by using the balance sheet) are reported in the cash flows from financing activities section of heet) the cash flow statement. low Cash inflows consist of the issuing of shares and debentures. When an investor purchases shares or debentures from a business entity they are lending the entity money with the promise of cash flows in the future. Another form of cash in inflows from financing activities consist of bank s loans however the repayment of a bank loan is an outflow. outflow Cash outflows consist of the repayment of loans to borrowers, the retirement of shares (a company purchasing shares back from investors) and the payment of dividends to investors.
Cash flows from financing activities Cash from the issue of common stock (inflow) Cash from long term borrowings (inflow) Repayment of borrowings (outflow) Payment of dividends (outflow) Net cash used in financing activities

$xxx $xxx $ (xxx) $ (xxx) $xxx

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Statement of Cash Flows

The Relationship between the Cash Flow Statement and the Balance Sheet tatement heet
A change in current assets and Current Assets 2012 Cash at bank $xxx Accounts receivable $xxx Inventory $xxx Prepaid insurance $xxx Current liabilities Salaries payable Accounts payable Interest payable $xxx $xxx $xxx liabilities (excluding cash at bank) bank) 2011 change $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx

is reported under cash flows from operating activities. activities Cash flows from operating activities Cash receipts from customers $ xxx Cash paid to suppliers and employees $(xxx) Cash generated from operations $ xxx Interest paid $(xxx) Income tax paid $(xxx) Net cash from operating activities $xxx A change in non non-current assets Non- Current Assets Land Buildings Investments Vehicles 2012 $xxx $xxx $xxx $xxx 2011 $xxx $xxx $xxx $xxx change $xxx $xxx $xxx $xxx

is reported under cash flows from financing activities. Cash flows from investing activities Purchase PP&E Purchase of investments Sale of non-current assets Dividends received Net cash used in investing activities A change in non non-current liabilities and owners equity Non-current current liabilities Loan payable Owners Equity Contributed capital Retained earning 2012 $xxx 2011 $xxx change $xxx $(xxx) $(xxx) $ xxx $ xxx $xxx

$xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx $xxx is reported under cash flows from financing activities. is Cash flows from financing activities Cash from issue of common stock Cash from long term borrowings Repayment of borrowings Payment of dividends Net cash used in financing activities $(xxx) $(xxx) $ xxx $ xxx $xxx

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Statement of Cash Flows

The change in cash

Cash flow of assets Say that an entity purchases a computer. Their assets have increased but their cash has decreased Now say that they sold the old computer they originally had. Their assets have decreased but their cash has increased due to the cash received from the sal of the computer. sale What if an entity sells an asset on credit? Account receivables increase but no cash has been received so we say that cash has been decreased. Cash flow of liabilities The entity purchased the computer on credit so no cash exchanged hands. Liabilities increase because the entity is liable to pay for the computer at some point in the future. What has happened to their cash? The entity has reserved cash by delaying payment so we say that cash payment has increased increased. The entity pays their account owing for the computer. By doing so they have decreased their liabilities. As a result of decreasing their liability . they have used cash, so cash has decreased. Cash flow of equity The entity issues $100,000 worth of ordinary shares. Owners equity e has increased. Investors lend the entity cash and so the entities cash increased. has therefore increased. The entity may choose to retire or buy back their ordinary shares. This decreases owner equity and decreases their cash. owners cash Summary Lets try to summaries what weve learnt so far. A change in assets will see a change in cash in the opposite direction. Assets increase cash decreases Assets decrease cash increases A change in liabilities and owners equity will see a change in cash in the same direction. Liabilities and Owners Equity increase cash increases Liabilities and Owners Equity decrease cash decreases

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Statement of Cash Flows

Creating a Cash Flow Statement Example 1

The following transactions were undertaken by Hayden Ltd during the financial year ended 30 June 2012.

Begin by determining which items are classified as financing activities, investing activities and operating activities. Make a side note next to each item.

F O I I F+O O O F O O I I

Issued ordinary shares for cash $500,000 Cash received from customers $150,000 Purchased land $100,000 Received cash from the sale of machinery $90,000 Paid bank mortgage $120,000 plus $14,000 interest Paid cash to suppliers for the purchase of inventory $45,000 Insurance paid $1,000 Paid dividends to investors $30,000 Paid wages and salaries expense $21,000 Paid income taxes $12,000 Purchased ordinary shares $20,000 from Texas Ltd. Cash received from interest $900 Cash balance as at 30 June 2011 $25,000 Hayden Ltd. Statement of Cash Flows For the year ended 30 June 2012

Cash flows from operating activities Cash receipts from customers 2 (inflow) Cash paid to suppliers 6 + 7 (outflow) Cash paid to employees 9 (outflow) Cash generated from operations Interest received Interest paid 5 (outflow) Tax paid 10 (outflow) Net cash provided by operating activities Cash flows from investing activities Purchase of planet, property and equipment 3 (outflow) Purchase of investments 11 (outflow) Cash from sale of non non-current assets 4 (inflow) Net cash used in investing activities Cash flows from financing activities Cash from the issue of common stock 1 (inflow) Repayment of borrowings 5 (outflow) Payment of dividends 8 (outflow) Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period 13 Cash and cash equivalents at end of period

150,000 (46,000) (21,000) 83,000 900 (14,000) (12,000)

$57,900

($100,000) (20,000) 90,000 $(30,000)

500,000 (120,000) (30,000) $350,000 $377,900 $25,000 $352,900

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Statement of Cash Flows Hayden Ltd. Income Statement For the year ended 30 June 2012 Sales revenue Cost of goods sold Gross profit Other Revenue Interest revenue Gain on assets Expenses Advertising expense Insurance expense Wages and salaries expenses Interest expense Depreciation expense - machinery Net income before tax Less: Income tax Net Income 450,000 170,000 280,000 4,000 1,000 9,000 24,000 56,000 2,000 19,000 5,000

110,000 175,000 54,600 120,400

Hayden Ltd. Statement of financial position As at 30 June 2012 Current Assets Cash at bank Accounts receivable Inventory Prepaid insurance Interest receivable Non-Current Assets Current Investments Plant, property and equipment Accumulated depreciation machinery TOTAL ASSETS Liabilities Accounts payable Wages and salaries payable Advertising expense payable Equity Hayden Ltd Capital TOTAL LAIBILITIES AND EQUITY 30 June 2012 35,000 27,000 40,000 500 600 20,000 200,000 (15,000) 308,100 34,000 12,000 100 262,000 308,100 30 June 20011 30,000 20,000 44,000 800 400 10,000 150,000 (10,000) 245,200 245,2 32,000 8,000 400 204,800 245,200 Change 5,000 7,000 (4,000) (300) 200 10,000 50,000 (5,000) 62,900 2,000 4,000 (300) 57,200 62,900

Hayden Ltd Statement of Changes in Equity For the year ended 30 June 2012 Balance at June 30 2011 Net income Less: Drawings Balance at June 30 2012 204,800 120,400 (63,200) 262,000
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Statement of Cash Flows

Creating a Cash Flow Statement Direct Method - Example 2

Cash flows from operating activities As stated early, the idea of a cash flow statement is to see how much cash is generated during the period. In order to determine net cash from operating activities under the direct method, it is necessary to convert items used in determining profit under the accrual basis to a ca cash basis. To do this we will be using the financial statements shown on the previous page. 1. Calculating cash receipts from customers Cash receipts from customers is an inflow of cash. When goods are sold . on credit account receivables and revenue increase under accrual basis. However with cash basis accounting revenue is not recognised until cash has been received. So effectively we do not want to include an entities account receiva receivables in the cash flow statement. What we want to atement. determined is how much of those credit sales (account receivables) have been received during the period. Earlier we stated that an increase in assets results in a decrease in cash and a decrease in assets results in an increase in cash. Assets increase cash decreases Assets decrease cash increases An easy way of determining cash receipts from customers is by asking, when account receivables increase what happens to cash? When account receivables increase, cash decreases. Sales revenue is $450,000 Account receivables have increased during the period by $7,000 which effectively de decreases cash by $7,000. Cash receipts from customers equal:
+450,000 increase/ crease/inflow -$7,000 Decrease in cash = $443,000 increase/inflow

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Statement of Cash Flows

2. Calculating cash paid to suppliers and employees Cash paid to suppliers and employees is an outflow of cash. When goods are purchased on credit an entity is deferring payment and thus increasing the amount of cash they have. Under the accrual basis of accounting, purchases of inventory on credit is recognised when the goods are received and not when the goods are paid for. This results in both an increase in inventory and an increase in account payable. Under accounts the cash basis of accounting the purchase of inventory is not recognised until cash has been paid. So effectively we do not want to include any purchases of goods or services that an entity has not outlaid any cash for in our cash flow s statement. Calculating cash paid to suppliers When determining cash paid to suppliers we need to take a look at cost of goods sold found on the income statement, and inventory and account payables found on the balance sheet. Assets increase cash decreases Assets decrease cash increases Liabilities and increase cash increases Liabilities and decrease cash decreases From the balance sheet we can see that inventory has decreased by $4,000 during the period A decrease in assets results in an increase in period. cash of $4,000 $4,000. During the period account payables increased by $2,000. An increase in account payables results in an increase in cash of $2,000. $2,000 Cost of goods sold is a decrease in cash or a cash outflow. -$170,000 outflow Cash paid to supp ash suppliers is:
-$170,000 170,000 decrease/outflow +$4,000 increase in cash +$2,000 increase in cash = -$164,000 decrease/outflow

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Statement of Cash Flows

Calculating cash paid to employees Another cash outflow that comes under this category is the outflow of cash paid to employees. Wages and salaries paid during the period are found on the income statement under expenses. The amount still owing ound to employees (wages and salaries payable) can be found on the balance sheet under current liabilities. Determining the amount of cash paid to employees during the period is as follows: ployees Wages and salaries expense represent a cash outflow. A cash outflow results in a decrease in cash. -$56,000 Wages and salaries payable have increased by $4,000 during the period. An increase is liabilities results in an increase in cash. Cash paid to employees is: ash
-$56,000 ,000 decrease/outflow -$4,000 decrease in cash = -$52,000 decrease/outflow

Calculating cash paid to employees The income statement also shows advertising expense for the period of $9,000. The balance sheet shows that the advertising expense has decreased by $300 during the period. The $300 decrease in advertising expense payable during the period represents a decrease in cash. Therefore cash paid for advertising is:
-$9,000 9,000 decrease/outflow -$3,000 decrease in cash = -$9,300 decrease/outflow

A different type of expense is a prepaid expense. Take insurance expense for example. For the period insurance expense amounted to $24,000. On our balance sheet under current assets prepaid insurance has decreased by $300 ($500 - $800) Insurance expense represents a decrease in cash. -$24,000 $24,000 A decrease in assets (prepaid insurance) is an increase in cash. +$3,000
-$24,000 ,000 decrease/outflow +$300 increase in cash = -$23,700 decrease/outflow

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Statement of Cash Flows

Now we can calculate the total cash outflow to suppliers and employees
Cash paid to suppliers for purchases Cash paid to employees Cash paid for advertising Cash paid for Insurance Total cash outlay to suppliers and employees (outflow) $164,000 $52,000 $9,300 $23,7000 $249,000

3. Calculating interest revenue and interest expense Its important to note that interest revenue can come under either cash from operating activities or cash from investing activities. Interest revenue is earned as a result of day-to-day operations and so hence the ay reason for classifying it under cash flows from operating activities. However, interest revenue is earned as a result of making investments and hence the reason for classifying interest revenue under cash flows from investing activities. Since interest expense is classified as cash from investing operating activities we will classify interest revenue the same way. Just beware that it can come under either heading. Calculating interest revenue Revenue earned for the period is calculated the same way as cash receipts from customers. The income statement shows $4,000 of interest revenue earned during the period. The balance sheet shows that there was an increase in interest receivable of $200 for the period. r Interest revenue is an increase in cash. +$4,000 Interest receivables have increased by $200. An increase in assets results in a decrease in cash. -$200
+4,000 increase/ crease/inflow -$200 decrease in cash = $3,800 increase/inflow

Calculating interest expense Interest expense for the period amounted to $2,000. If there was interest payable under current liabilities on the balance sheet then the cash outflow of interest expense would be calculated the same way as other expenses. Since there is no interest payable on the balance sheet the cash outflow of interest for the period simply equals $2,000 taken directly from the income statement statement.

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Statement of Cash Flows

Calculating cash flows from operating activities We have now calculated everything that makes up the cash flows from operating activities section of the cash flow statement.
Cash flows from operating activities Cash receipts from customers (inflow) Cash paid to suppliers (outflow) Cash paid to employees (outflow) Interest received (inflow) Interest paid (outflow) Tax paid Net cash provided by operating activities

443,000 (197,000) (52,000) 3,800 (2,000) (54,600) $141,200

Cash flows from investing activities Cash flows from investing activities mainly consist of the purchase and sale of non-current assets like plant property and equipment and long current term investments. The acquisition and disposal of non current assets non-current The acquisition or purchase of a non current asset is a cash outflow as non-current cash is being paid out to acquire a new asset. The disposal or sale of a non-current asset is a cash inflow as cash is being received in return for current the asset. On the balance sheet plant, property and equipment has increased by $50,000 during the period. An increase in assets is a decrease in cash. -$50,000 Depreciation is an expense, which can be found on the income statement. An increase in expenses is a decrease in cash. -$19,000 $19,000 The effect that the accumulated depreciation has on cash is difficult to explain because it is a contra asset account. The accumulated depreciation account has technically increased from $10,000 to $15,000 which you would expect. An increase in accumulated depreciation results in an increase in cash. (This contradicts what we said earlier when we explained that an increase in an asset account results in a decrease in cash. This rule however, does not apply to contra asset accounts. A change in a contra asset account will affect cash in the same direction.) Cash outlaid for plant, property and equipment during the period is:
-$50,000 50,000 decrease/outflow -$19,000 decrease in cash +$5,000 increase in cash = -$64,000 decrease/outflow

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Statement of Cash Flows

Calculating the gain/loss on the disposal of asset assets If plant, property and equipment is sold during the period then the gain or loss will appear on the income statement. In our example there was a $1,000 gain on the disposal of an asset which is shown on the income statement. Calculating cash outlaid on investments The last item we need to determine is the amount spent on investments. The change in investments on the balance sheet indicates that there was sheet an increase in investments during the period. An increase in assets by $10,000 results in a decrease in cash by $10,000. Now that we have all the information that makes up the cash flows from makes investing activities section we can produce the second part of our cash c flows statement. tatement.
Cash flows from investing activities Purchase of planet, property and equipment (outflow) Purchase of investments (outflow) proceeds from sale of non non-current assets (inflow) Net cash used in investing activities

$(64,000) $( $(10,000) $(10,000 $ 1,000 $(73,000)

Cash flows from financing activities Cash flows from financing activities consist of the inflow of additional capital by equity owners or through the sale of financial instruments, such as ordinary shares. Outflows of cash will occur from dividends being paid to shareholders and drawings of capital from business drawings owners/partners. In our example we have no inflow of cash from long term investments. We have a change in equity so we need to determine the drawings for the period. We can use the formula below:

If owners equity increases cash increases If owners equity decreases cash decreases
The balance sheet shows that owners equity has increased. An increase owners in owners equity results in an increase in cash. We always represent net profit as a negative figure.
-$120,400 $120,400 +$57,200 increase in cash = -$63,200 decrease/outflow

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Statement of Cash Flows

The cash flows from financing activities section of our cash flow statement will look like this this:
Cash flows from financing activities Cash from the issue of common stock (inflow) Cash from long term borrowings (inflow) Repayment of borrowings (outflow) Payment of dividends (outflow) Drawings from owners (outflow) Net cash used in financing activities

$0 $0 $ (0) $ (0) $(63,200) $(63,200)

The last step is adding cash flows from the current period to the cash and cash equivalents from the beginning of the period.

Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

$5,000 $30,000 $35,000

The net increase (decrease) in cash and cash equivalents will equal the difference between the opening cash at bank balance and the closing cash at bank balance on the balance sheet. So you can ng sheet. always check that you have the correct answer.
Balance Sheet extract
Current Assets Cash at bank Accounts receivable Inventory 30 June 2012 35,000 27,000 40,000 30 June 20011 30,000 20,000 44,000 Change 5,000 7,000 (4,000)

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Statement of Cash Flows

Completed statement of cash flow

Hayden Ltd. Statement of Cash Flows For the year ended 30 June 2012 Notes Cash flows from operating activities Cash receipts from customers (inflow) Cash paid to suppliers (outflow) Cash paid to employees (outflow) Interest received (inflow) Interest paid (outflow) Tax paid (outflow) Net cash provided by operating activities Cash flows from investing activities Purchase of plant, property and equipment (outflow) Purchase of investments (outflow) proceeds from sale of non non-current assets (inflow) Net cash used in investing activities Cash flows from financing activities Cash from the issue of common stock (inflow) Cash from long term borrowings (inflow) Repayment of borrowings (outflow) Payment of dividends (outflow) Drawings from owners (outflow) Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 6 443,000 (197,000) (52,000) 3,800 (2,000) (54,600) 9 $(64,000) $(10,000) $ 1,000 $(73,000) $0 $0 $ (0) $ (0) $(63,200) $(63,200) $5,000 $30,000 $35,000 $141,200

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Statement of Cash Flows

Creating a Cash Flow Statement Indirect Method - Example 3

There is an alternative way of creating a cash flow statement. It is referred to as the indirect method. The only part of the cash flow statement that differs between the direct and indirect method is the cash flows from operating activities activities. Using the direct method we start with receipts from customers, subtract cash paid to suppliers and employees until we arrive at cash generated from operation. However, using the indirect we start with profit before tax until we arrive at cash generated from operations. operations. Using the same set of financial statements as we used in the previous example we will demonstrate how to do so. 1. Start with profit before tax from the income statement. +$175,000 2. Add back all non cash expense items that appear on the income non-cash statement, e.g. depreciation expense. +$19,000 3. Subtract interest expense (interest expense or interest paid will be added back at the end. It is preferred that interest paid is shown separately after cash generated from operations is determined). -$4,000 4. Subtract all cash inflow items that appear under investing and financing activities. Gain on asset -$1,000 5. Add back all cash outflows that appear under investing and financing activities. $0 6. Subtract increases in current assets or add decreases in current assets. Go through all the current assets on the balance sheet one by one excluding cash. Account receivables have increased by $7,000. This results in a decrease in cash so we subtract it from our cash profit. profit Inventory has decreased by $4,000. This results in an increase in ,000. cash so we add it to our cash profit. Prepaid insurance decreased by $300. This results in an increase in cash so we add it to our cash profit. Interest receivable has increased by $200. This results in a decrease in cash so we subtract it from our cash profit.

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Statement of Cash Flows

7. Subtract any decreases in current liabilities or add any increases in current liabilities. Go through all the current liabilities on the balance sheet one by one. Account payable have increased during the period by $2,000. An payables increase in liabilities results in an increase in cash so we add $2,000 to our profit. Wages and salaries payable have increased by $4,000. This results in an increase in cash by $4,000 which we add to our profit. Advertising expense has decreased during the period by $300. This results in a decrease in cash so we subtract this from net profit. 8. Calculate cash generated from operations. 9. Subtract interest and tax paid. $2,000 and $54,600 respectively 10.Calculate ne cash from operating activities. Calculate net Noticed anything? We are still using the rules we emphasised earlier. A change in assets will see a change in cash in the opposite direction. Assets increase cash decreases Assets decrease cash increases A change in liabilities and owners equity will see a change in cash in the same direction. Liabilities and Owners Equity increase cash increases Liabilities and Owners Equity decrease cash decreases

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Statement of Cash Flows

Hayden Ltd. Statement of Cash Flows For the year ended 30 June 2012
Cash from operating activities Net income before tax Add: depreciation expense : Add: interest expense : Less: gain on asset Less: accounts receivable : Add: inventory : Add: prepaid insurance Less: interest receivable : Add: accounts payable : Add: wages and salaries payable : Less: advertising expense payable Cash generated from operations Less: Interest paid Less: Income tax paid Net cash from operating activities 175,000 19,000 2,000 (1,000) (7,000) 4,000 300 (200) 2,000 4,000 (300) 197,800 (2,000) (54,600) 141,200

Calculating the cash flows from investing and financing activities is no different from the direct method. The only difference between the two methods is the way cash flows from operating activities is presented.

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Statement of Cash Flows

Notes to the cash flow statement

Lets assume that we use the direct method when constructing a statement of cash flow. To every statement there are accompanying notes, which are found in the notes sect section of financial reports. Cash flow statements should be read in conjunction with these notes to get the tatements should whole picture. The number of the note is indicated next to the corresponding item on the c cash flow statement within the note column. tatement The first note will usually correspond with the last line of the c cash flow statement (cash and cash equivalents at end of period). This note just indicates the amount of cash and short term deposits that make up cash and cash equivalents.
6. Cash and cash equivalents 30 June 2012 Cash at bank Short term deposits Cash and cash equivalents $27,000 $8,000 $35,000

Short term deposits mature between 30 and 60 days. The fair value of cash and Short cash equivalent is equal to carrying value. value.

The second note will outline how cash from operating activities was determined. This is simply the indirect method of determining cash from operating activities. At the bottom of this it is important to disclose any non-cash investing and financing activities. cash
11. Reconciliation of net income before tax from operating activ activities to profit. Cash from operating activities Net income before tax 175,000 Add: depreciation expense : 19,000 Add: tax expense (54,600) Less: gain on asset (1,000) Less: accounts receivables : (7,000) Add: inventory : 4,000 Add: prepaid insurance 300 Less: interest receivable : (200) Add: accounts payables : 2,000 Add: wages and salaries payable : 4,000 Less: advertising expense payable (300) Less: Interest paid (2000) Net cash from operating activities 141,200 Non-cash investing and financing activities cash During the period, the company issued $1,000,000 of new securities under a During dividend reinvestment plan. $4,000,000 was raised through the issue of these securities and thus is not reflected in the Cash Flow Statement on the basis that it has been reinvested in the companys securities. en securities.

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Statement of Cash Flows

Analysing Cash Flow Statement

When analysing a cash flow statement it should be compared with the companys income statement. You want to compare cash from operating s activities with net income. If cash from operating activities exceeds net income then the company is said to be doing well, that is, they are receiving cash from the sale of goods in a timely and effective manner. and However if net income exceeds cash from operating activities the question must be asked, why is the company not receiving cash for their goods sold or services rendered. The main reason will be either to many bad debts (debtors refusing to pay their accounts) or accounts are not refusing being paid in a timely manner. Net income was calculated to be $120,400. The cash generated from operating activities amounted to $141,200. This indicates that debtors accounts are being received and are being received in a timely manner. The other sections of the cash flow statement should also be analysed to see how well the company performed in both investing and financing activities. However, dont be fooled. The cash flow statement can also be misleading. The cash flow statement can be easily manipulated to show or rather not show what business entities decide. Business entities can make cash flows appear better by not paying off any short term or long any term liabilities, not acquiring any new capital, such as land and equipment or by selling off non current assets that shouldnt be sold. Doing this non-current however will affect future periods, like having to buy back that asset that they sold that shouldnt have been, or having to outlay twice the amount of cash for short term or long term liabilities. This is why it is important, if possible, to review previous period cash flow statements in order to get tatements the whole picture! Cash flows stateme statements dont show non-cash transactions like the trading cash in of an asset for a new model or the purchase of non non-current assets by long term debt. So to conclude, the cash flow statement can tell us a lot about a companys performance and the way in which they use the cash they they generate; just keep in mind, that theres a lot the is left to the ; imagination.

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