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Financial Accounting 2
Lecture 5
Statement of Cash Flows
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2
Lecture 5 Outline
• Explain the reasons for preparing a statement of cash flows
1. • Describe the general format for a statement of cash flows
Differences
between profit Comparing Entity’s ability to
and net cash entities adapt to change
from operations
General format – AASB107
Investing Financing
Concept of cash –
AASB107
• Cash is defined as cash and cash equivalents
• Cash: cash on hand and demand deposits
Cash
Pay dividends
(may be operating)
Class Activity
Indicate whether the following transactions are: Cash Inflows (CI)/ Cash
Outflows (CO) or Non Cash Flows (NCF) and if there is a cash flow, indicate
whether it is: operating (O), investing (I) or financing (F).
• Spreadsheet approach
• Reconstruction (T-account) method
Common
methods
• Formula method
Cash flow from operating
activities
Receipts
from
customers
Payments
to
employees
Receipts from customers
Sales revenue represents both:
Cash sales Credit sales
Sales
Factors Movement
Discounts to
customers to in Accounts
Receivable
consider
Bad debts
Written off
Discounts Allowed and Bad Debt
Write-offs
Journal entry to record discount allowed to a customer:
DR Cash at Bank
DR Discount Allowed
CR Accounts Receivable
2011 2012
20 500 20 500
Worked Example – cash receipts
STEP TWO: Reconstruct Accounts Receivable
Accounts Receivable
Opening balance 189 000 Cash Received 6 859 750
Bad debts W/O 8 000
Discount allowed 4 750
STEP TWO:
Use the bad debts written off amount calculated in
step one in the reconstruction of Accounts
Receivable (and any discount allowed) before
calculating the cash received from customers.
Calculating Payments to Suppliers
Accounts Payable
DR Accounts Payable
CR Discount Received
CR Cash at Bank
DATA:
2011 2012
Inventory
Opening balance 483 000 Cost of sales 3 660 000
Accounts Payable
AASB107
• Non-Cash Financing and
Para. 43
Investing Activities
Note 3
Operating activities - the indirect
method
• Under the indirect method; profit/(loss) is adjusted
for:
1. • Non-cash items
Dividend Payable
Cash paid 160 000 Opening balance 160 000
Transfers to reserves
Opening balance
Tax Paid – cash outflow
Closing balance Income tax expense
Worked Example – cash paid for
income tax with no temporary
differences
DATA:
2011 2012
27 561 27 561
Income tax paid with temporary
differences
2012 2011
Balance Sheet Extracts:
Deferred Tax Asset 2 200 2 000
Current Tax Liability 290 000 250 000
Deferred Tax Liability 7 500 6 500
Income Statement Extract:
Income Tax Expense 295 000